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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 26, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from . . . . . . . . to . . . . . . . .
Commission file number 1-8978
LONGS DRUG STORES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Maryland 68-0048627
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
141 North Civic Drive
Walnut Creek, California 94596
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (510) 937-1170
---------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
The Exhibit Index is located on page 4 of this form.
(Cover page 1 of 2 pages)
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as computed by the price of the registrant's shares on the New York
Stock Exchange at the close of business on April 4, 1995, was approximately
$697,243,815.
There were 20,659,076 shares of common stock outstanding as of April 4, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
The Longs Drug Stores Corporation Annual Report to Shareholders for the year
ended January 26, 1995 (hereinafter referred to as the Annual Report), has been
incorporated by reference into:
Part I - Items 1 and 2
Part II - Items 5, 6, 7, and 8
Part IV - Item 14(a)(1)
The definitive proxy statement dated April 4, 1995, involving the election of
directors, has been incorporated by reference into Part III, Items 10, 11, 12,
and 13.
(Cover page 2 of 2 pages)
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PART I
ITEM 1. BUSINESS
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The Company's business is highly competitive. It competes in the retail drug
industry with local and national chains as well as with independent merchants.
Merchandise of the kind sold by the Company can be found in variety stores,
discount houses, supermarkets, and other retail facilities.
The remainder of the information required by this item is contained in the
Annual Report under the headings "COMPANY PROFILE" (page 2), "MANAGEMENT'S
DISCUSSION AND ANALYSIS" (page 12), and "QUARTERLY FINANCIAL DATA (UNAUDITED)
AND FIVE YEAR SELECTED FINANCIAL DATA" (page 19). Such information is hereby
incorporated by reference and filed herewith.
ITEM 2. PROPERTIES
----------
The information required by this item is contained in the Annual Report under
the heading "COMPANY PROFILE" (page 2). Such information is hereby incorporated
by reference and filed herewith.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Registrant is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
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There were no matters submitted to a vote of stockholders during the fourth
quarter period covered by this report.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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MATTERS
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The information required by this item is contained in the Annual Report under
the headings "STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY" (page 16),
"STOCKHOLDERS' EQUITY" (page 18), "QUARTERLY FINANCIAL DATA (UNAUDITED) AND
FIVE YEAR SELECTED FINANCIAL DATA" (page 19), and "STOCK LISTING" (page 20).
Such information is hereby incorporated by reference and filed herewith.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The information required by this item is contained in the Annual Report under
the heading "MANAGEMENT'S DISCUSSION AND ANALYSIS" (page 12), and "QUARTERLY
FINANCIAL DATA (UNAUDITED) AND FIVE YEAR SELECTED FINANCIAL DATA" (page 19).
Such information is hereby incorporated by reference and filed herewith.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information required by this item is contained in the Annual Report under
the headings "MESSAGE TO SHAREHOLDERS" (pages 3 through 11) and "MANAGEMENT'S
DISCUSSION AND ANALYSIS" (page 12). Such information is hereby incorporated
by reference and filed herewith.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The information required by this item is contained in the Annual Report
(pages 13 through 19). Such information is hereby incorporated by reference
and filed herewith.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this item with respect to directors is contained
in a definitive proxy statement dated April 4, 1995, with the Securities and
Exchange Commission. Such information is hereby incorporated by reference.
Certain information relating to executive officers of the Company appears at
page 3 of this Form 10-K Annual Report.
Items 11, 12, and 13 are omitted since the Company filed its definitive proxy
statement dated April 4, 1995, with the Securities and Exchange Commission
involving the election of directors, for the Annual Meeting on May 16, 1995.
Such information is hereby incorporated by reference.
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EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
The following persons are now executive officers of the Company and the Board of
Directors intends to reappoint them to their current offices.
Executive Officer's
Primary Executive Position
Name Age Position with Registrant Held Since(1)(2)
- ----------------- ---- -------------------------------- --------------------
R. M. Long 56 Chairman of the Board 1991
Chief Executive Officer(3) 1977
S. D. Roath 54 President(3) 1991
B. M. Brandon 56 Senior Vice President 1988
G. A. Duey 62 Senior Vice President 1988
O. D. Jones 56 Senior Vice President, Properties and 1975
Secretary
R. A. Plomgren 61 Senior Vice President, Development(3) 1976
D. R. Wilson 53 Senior Vice President, Marketing 1988
W. G. Combs 64 Vice President, Administration 1961
G. L. White 54 Vice President, Controller 1988
C. E. Selland 38 Treasurer 1994
- ----------------------------
(1)Each officer is appointed for a one-year term.
(2)All of the executive officers of the Company have been employed by the
Company for at least the past five years in executive capacities or in related
areas of responsibility.
(3)Also serves as a Director of the Company.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
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(a)(1) FINANCIAL STATEMENTS
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The following financial statements and independent auditors' report
appearing in the Annual Report, on pages 13 through 19, are
incorporated herein by reference:
Statements of Consolidated Income for the fiscal years ended
January 26, 1995, January 27, 1994, and January 28, 1993.
Consolidated Balance Sheets as of January 26, 1995, and
January 27, 1994.
Statements of Consolidated Cash Flows for the fiscal years ended
January 26, 1995, January 27, 1994, and January 28, 1993.
Statements of Consolidated Stockholders' Equity for the fiscal
years ended January 26, 1995, January 27, 1994, and January 28,
1993.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
(a)(2) Not applicable.
(a)(3) EXHIBITS
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Exhibit
No.
3. Articles of Incorporation and By-Laws
a. A copy of the Articles of Incorporation and By-Laws of
Longs Drug Stores Corporation is incorporated herein by
reference as previously filed with the Commission on
March 18, 1985, as Exhibit 3 to Form S-14, Registration
No. 2-96486.
10. Material Contracts
a. Agreement for terminal benefits in the event of uninvited
change in corporate control of Longs Drug Stores
California, Inc., is incorporated herein by reference as
previously filed with the Commission on April 28, 1986, as
Exhibit 10f to Form 10-K.
b. A copy of the Rights Agreement of Longs Drug Stores
Corporation dated August 19, 1986, is incorporated herein
by reference as previously filed with the Commission on
August 21, 1986, as Exhibits 1 and 2 to Form 8-A.
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Exhibit Page
No.: Number
c. A copy of the Long Term Incentive Plan of 1987 of Longs
Drug Stores Corporation is incorporated herein by reference
as previously filed with the Commission on March 13, 1987,
on Form S-8, Registration No. 33-12653.
d. A copy of the undertakings of Longs Drug Stores Corporation
is incorporated herein by reference as previously filed
with the Commission on April 10, 1987, into Form S-8,
Registration No. 2-97578.
e. A copy of the First Amendment to Rights Agreement of Longs
Drug Stores Corporation dated November 15, 1988, is
incorporated herein by reference as previously filed with
the Commission on December 1, 1988, as Exhibit 1 to Form
8-K.
f. A copy of the Note Purchase Agreement of Longs Drug Stores
California, Inc., dated April 28, 1989, is incorporated
herein by reference as previously filed with the Commission
on April 18, 1990, as Exhibit 10n to Form 10-K.
g. A copy of the Proposal to acquire Bill's Drugs, Inc. is
incorporated herein by reference as previously filed with
the Commission on August 6, 1993, on Form S-4, Registration
No. 033-49935.
h. A copy of the 1995 Long-Term Incentive Plan of Longs Drug
Stores Corporation is incorporated herein by reference as
previously filed with the Commission on August 5, 1994,
on Form S-8, Registration No. 033-54959.
13. Annual Report . . . . . . . . . . . . . . . . . . . . (Enclosed)
21. Subsidiary of the Registrant - Longs Drug Stores California,
Inc., a California Corporation.
23. Consent of Auditors
a. Independent Auditors' Consent. . . . . . . . . . . . . . 8
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(b) REPORTS ON FORM 8-K
There have been no reports on Form 8-K filed during the quarter ended
January 26, 1995.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LONGS DRUG STORES CORPORATION
----------------------------------
(REGISTRANT)
Date April 17, 1995 /s/ G. L. White
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(G. L. White)
Vice President - Controller
(PRINCIPAL ACCOUNTING OFFICER)
Date April 17, 1995 /s/ C. E. Selland
------------------------------ ----------------------------------
(C. E. Selland)
Treasurer
(PRINCIPAL FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Date Signature
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April 17, 1995 By /s/ R. M. Long
- ----------------------------------- -------------------------------
(R. M. Long)
Chairman of the Board
Chief Executive Officer and
Director
April 17, 1995 By /s/ S. D. Roath
- ----------------------------------- -------------------------------
(S. D. Roath)
President and Director
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Date Signature
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April 17, 1995 By /s/ W. G. Combs
- ----------------------------------- -------------------------------
(W. G. Combs)
Vice President - Administration
and Director
By
- ----------------------------------- -------------------------------
(R. M. Brooks)
Director
By
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(D. G. DeSchane)
Director
April 17, 1995 By /s/ E. E. Johnston
- ----------------------------------- -------------------------------
(E. E. Johnston)
Director
April 17, 1995 By /s/ M. S. Metz
- ----------------------------------- -------------------------------
(M. S. Metz)
Director
April 17, 1995 By /s/ R. A. Plomgren
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(R. A. Plomgren)
Senior Vice President -
Development and Director
By
- ----------------------------------- -------------------------------
(H. R. Somerset)
Director
April 17, 1995 By /s/ T. R. Sweeney
- ----------------------------------- -------------------------------
(T. R. Sweeney)
Retired Vice President
and Director
By
- ----------------------------------- -------------------------------
(F. E. Trotter)
Director
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COMPANY PROFILE
Longs Drug Stores is one of the largest drug store chains in North America
serving the American West for over 57 years.
During the years since our first store opened our store count has grown. As of
March 31, 1995, Longs operates 324 stores: with 278 in California, 32 in Hawaii,
six each in Colorado and Nevada, and two in Alaska. During the fiscal year 1995,
we opened 19 new stores and closed or replaced seven.
Our stores vary in size with the majority ranging from 15,000 to 25,000 square
feet. The average size of stores opened during the last five years is 19,000
square feet, with approximately 67% devoted to selling space. Sales per store
averaged $8.2 million for the fiscal year just ended.
Pharmacy is the cornerstone of our business, accounting for over 30% of our
sales volume in fiscal year 1995. Complementing the Pharmacy business are the
core categories of Photo, Cosmetics and Greeting Cards.
The Company's decentralized philosophy allows store managers to enhance the
product mix of their individual stores based on customer preferences in their
communities. Longs sells nationally advertised name-brand merchandise. Certain
other items are sold under the Longs private label.
Longs General Offices provide accounting, information systems, personnel, real
estate and legal services to the stores, and act as communication centers for
information on marketing and merchandising.
The General Offices and 118 of our stores are Company-owned buildings on
Company-owned land; 42 stores are Company-owned buildings on leased land, and
164 stores are totally leased.
All of these diverse elements combine to create an effective team that is
dedicated to the Company's tradition of providing service and value.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(THOUSANDS EXCEPT PER SHARE) 1995 1994
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<S> <C> <C>
SALES $2,558,269 $2,499,224
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NET INCOME* 48,731 49,751
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PER SHARE* 2.35 2.41
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DIVIDENDS 23,213 22,990
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PER SHARE 1.12 1.12
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STOCKHOLDERS' EQUITY 524,098 499,607
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PER SHARE** 25.23 23.92
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WORKING CAPITAL 168,786 143,981
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<FN>
*FISCAL 1994 NET INCOME AND PER SHARE INFORMATION BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE.
**BASED ON STOCKHOLDERS' EQUITY EXCLUDING COMMON STOCK CONTRIBUTION TO PROFIT
SHARING PLAN.
</TABLE>
COVER:
OUR SECOND STORE IN
KONA DISTRICT ON THE
BIG ISLAND OF [Photo]
HAWAII, OPENED IN
NOVEMBER OF 1994.
2
<PAGE>
MESSAGE TO SHAREHOLDERS
In fiscal 1995, transition and change continued to affect Longs and the markets
we serve. As a result, sales for the fiscal year increased 2.4% to $2.6 billion,
while our annual net income declined to $48.7 million.
During the fourth quarter we were able to slow down the declines we faced
earlier in the year. Fourth quarter results showed a 2% increase in both sales
and earnings. Positive results were prompted by our new systems that have
enabled us to improve margins. These new systems are directly tied to our
point-of-sale (POS) system.
The implementation of POS has helped us reduce the cost of merchandise, prompted
the redesign of how we work in our stores, initiated the first phases of
category management, and brought greater inventory control through our emerging
rapid replenishment system.
All of these enhancements support the plan that we announced last year. Some of
the major components of that plan are:
-- Redefine the role of our Marketing Department
-- Strengthen our Pharmacy operation
-- Further develop retail technology
-- Reduce overall operating costs
-- Explore additional growth opportunities
We have made significant progress in developing these strategies and each has
been assigned to the appropriate executive. Our team is now poised to deliver
improvements to our operation.
Let us acquaint you with some of the details of how we expect to deliver more
positive results in the coming year.
BOB LONG, CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER (STANDING); [Photo]
STEVE ROATH, COMPANY PRESIDENT (SEATED).
3
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REDEFINITION OF THE MARKETING DEPARTMENT
We significantly strengthened the partnership between our Marketing Department
and the stores this past year. Marketing's redefined role and function will
provide additional purchasing benefits to the stores, particularly in core
categories, and together they are a more powerful team.
We have begun to add Category Managers to the Marketing Department. Category
Managers make fact-based decisions using internal POS information and syndicated
market data from sources such as A.C. Nielsen and Information Resources
International (I.R.I.). Category Managers also receive information from
vendors who are willing to assist Longs in a "category" versus "brand"
perspective for our benefit.
Those categories that currently fall within the scope of a Category Manager
include: over-the-counter (OTC) drugs, Cosmetics, Imports and Photo. When fully
implemented, we can support a significant portion of our stores' merchandise
through category management.
The Marketing Department's redefined role encourages a stronger relationship
with the stores. Marketing speaks for the Company as a whole when dealing with
our suppliers and it acts as an advocate for the stores collectively. The team
created by this partnership enhances our expertise in merchandising.
While the Marketing Department assists stores in managing core classes of
merchandise, each store remains critical in the implementation of these specific
programs. In addition, each store retains its key decision-making role in niche
marketing -- providing goods and services in other categories that conform to
the needs of local markets.
This new and stronger partnership between the stores and the Marketing
Department will result in greater precision in merchandising and pricing while
lowering merchandise acquisition costs. This change gives Longs the best of both
worlds -- the benefits of centralized buying combined with our traditional
strength of store autonomy.
THE DRAMATIC CHANGES IN THE ROLE AND DIRECTION OF OUR MARKETING DEPARTMENT WERE
FACILITATED BY A GROUP OF EMPLOYEES FROM A CROSS-SECTION OF THE COMPANY. THIS
GROUP INCLUDED THE MEMBERS SHOWN HERE (FROM LEFT TO RIGHT): RON LOVELADY, VICE
PRESIDENT AND DISTRICT MANAGER; VERONICA BRAUNS, DIRECTOR OF SYSTEMS AND
PROGRAMMING; TERRY BURNSIDE, MERCHANDISE MANAGER; DAN WILSON, SENIOR VICE
PRESIDENT, MARKETING; AND DIANE FOURNIER, FINANCIAL ANALYST.
[Photo]
4
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RAPID REPLENISHMENT
Last summer we rolled out our rapid replenishment system in partnership with
some of our key suppliers. The system makes ordering easier and more efficient
for both our stores and our suppliers.
Rapid Replenishment is a sophisticated, computer-based system that
automatically generates merchandise orders each week. These orders are based on
actual sales movement of each product.
Benefits of Rapid Replenishment for BOTH partners include:
-- Reduction of costs
- Labor savings -
placing larger and fewer orders
- Reduced cost of goods
- Reduction of inventories
-- Enhanced customer service through
better in-stock conditions
[Photo]
PHARMACY
Pharmacy is the focal point of our store operations. Today our Pharmacies
account for more than 30% of our total sales, compared to 23% just four years
ago. We expect to see continued growth in Pharmacy.
Several factors contribute to the growth in our Pharmacies. An aging customer
base and a growing awareness of health-related issues explain some of this
increase, but we can also attribute this growth to our high levels of service.
Customers have confirmed in recent market research studies that Longs
pharmacists and their sense of caring provide us with one of our most powerful
means of differentiation in the marketplace.
This sense of differentiation is critical in the rapidly changing health care
arena. Many of the changes in health care are driven by growing governmental
concern over the health care system and the proliferation of MANAGED CARE. These
forces of change dramatically affect pharmacies throughout the chain drug
industry.
MANAGED CARE addresses both the cost and quality of health care, and the
Pharmacy serves as the centerpiece of this emerging health care philosophy. The
accessibility of the pharmacist, who serves as a guide and counselor to the
patient, is seen as an effective way to manage costs. Closer and more frequent
interaction between the
5
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pharmacist and patient will also improve the quality of health care through
correct and more consistent use of medication.
Our approach to the Pharmacy and the emerging managed care environment places
the patient first. The use of certified pharmacy technicians and improved
technology frees our pharmacists from routine dispensing tasks, making them more
available to our customers. In addition, our computerized pharmacy system
electronically connects all Longs mainland Pharmacies, enabling our pharmacists
to access patient files from any mainland Longs store.
We are also in the process of improving the Pharmacy through new store layouts,
new technologies, and the redesign of personnel functions. We expect these
enhancements to dramatically improve the efficiency and competitiveness of this
core department.
Improved Pharmacy efficiency is also being achieved through the implementation
of an automatic inventory replenishment system. As we phase in this new system,
we achieve greater control over our merchandise costs and inventory levels.
Increased efficiency and reduction of Pharmacy operating costs are paramount to
our continued success in this core category.
[Photo]
TECHNOLOGY, AS EXPRESSED THROUGH OUR INFORMATION SYSTEMS, BRINGS NEW TOOLS AND
INSIGHTS TO OUR DECISION MAKERS IN THE STORE.
TECHNOLOGY
We view technology as a tool that enables and empowers our decision makers
throughout the Company by providing them with valuable information. Technology
cuts across all of the elements of our plan. While technology automates parts of
our operation, its real value is that it provides INFORMATION which in turn
helps us to learn more about HOW TO MANAGE an individual store and our Company
as a whole.
Effective use of information systems enables us to make more informed decisions
about our business. This meaningful improvement helps us concentrate on those
areas of our operation that make us special, and differentiate us from our
competition.
6
<PAGE>
FOSTERING STRONG STORE TEAMS
This past year we redesigned the distribution of labor in our stores. This
re-engineering effort centered on organizing Longs people into effective teams.
Our redesigned format divides labor into four main functions: customer service,
management, service department specialists, and merchandise replenishment teams.
Merchandise replenishment teams represent the central component in our
restructuring efforts. These small teams of employees are responsible for
receiving goods and maintaining the look of merchandise in our stores.
Category management and rapid replenishment support this redistribution of
labor. Together we expect this combination of systems and store teams to result
in elevated levels of service, increased efficiency, and improved profitability.
[Photo]
[Photo]
TWO OF THE STRONGEST VENDOR PARTNERSHIPS WE ENJOY ARE WITH MCKESSON AND BERGEN
BRUNSWIG, OUR TWO LARGEST DRUG WHOLESALERS. THESE TWO WHOLESALERS PROVIDE THEIR
DISTRIBUTION EXPERTISE AS PART OF OUR GROWING RAPID REPLENISHMENT SYSTEMS.
Implementation of our rapid replenishment system is one way to achieve
differentiation. It is an extension of our POS system that automatically orders
merchandise when inventories fall to levels predetermined by store management.
Rapid replenishment exemplifies technology's pivotal role, especially now that
our rollout of POS is complete.
Our POS system is the foundation upon which rapid replenishment and category
management are based. These integrated systems work together through our use of
technology, enabling Longs to continue to be competitive.
7
<PAGE>
[Photo]
WE HAVE FINE-TUNED OUR PLANNING PROCESS. PAT TAKAHASHI, FINANCIAL PLANNING
MANAGER (LEFT), AND CLAY SELLAND, TREASURER (CENTER), WORK WITH OUR ALAMEDA
DISTRICT MANAGER MARTY STEPHENSON (RIGHT) ON PLANS FOR HER DISTRICT IN FISCAL
1996. PAT AND CLAY, ALONG WITH STEVE ROATH AND DAVE FONG, VICE PRESIDENT
PHARMACY, HELD SIMILAR MEETINGS WITH EACH OF OUR DISTRICT MANAGERS.
THE FORMER PAYLESS STORE IN WAIANAE, ON THE ISLAND OF OAHU, IS NOW BEING
CONVERTED TO A LONGS STORE. THIS LOCATION IS ONE OF SIX STORES RECENTLY
ACQUIRED FROM PAYLESS.
[Photo]
Dynamic use of technology not only makes us faster and more productive, it makes
us more effective at managing our business. We eagerly anticipate our future
using the information we garner from technology to facilitate learning and a
deeper understanding of our business.
REDUCTION OF OPERATING COSTS
Last year we reallocated the use of labor in our stores with the objective of
improving customer service and reducing non-selling functions. The creation of
store teams is central to this restructuring effort. These teams include:
customer service, management, service department specialists, and merchandise
replenishment.
We created merchandise replenishment teams by redesigning work that combines the
receiving and stocking functions in our stores. Most stores now have teams that
are responsible for stocking the majority of the sales floor. Virtually every
position in all of our mainland stores was affected as we implemented this
concept, and we are extremely proud of our people who have taken this vast
change in stride. Significant benefits are expected as we more fully execute
this strategy.
Rapid replenishment and category management will help us maximize the benefits
of this significant change by reducing non-selling store functions and improving
our customer service.
GROWTH OPPORTUNITIES
In January we announced the acquisition of six PayLess stores in Hawaii. Part of
this acquisition also included the
8
<PAGE>
purchase of merchandise and prescription files from additional PayLess stores in
Hawaii.
This acquisition brings our total number of stores in Hawaii to 32. We enjoy a
strong relationship with our customers in the Islands, and we welcome this
opportunity to extend Longs ALOHA to more of our friends in the island state.
We continue to vigilantly pursue growth opportunities wherever they may be, in
addition to closely monitoring our existing store base.
LONGS FOR A HEALTHY COMMUNITY
Our heritage and culture has always strongly supported efforts to give back to
the community at both the store and corporate levels. Last year we introduced
LONGS FOR A HEALTHY COMMUNITY as the banner under which we organize numerous
community service activities.
THIS PAST YEAR WE GAINED RENEWED UNDERSTANDING OF OUR MARKETPLACE THROUGH
CUSTOMER FOCUS GROUPS. THOUSANDS OF CUSTOMERS WERE QUERIED THROUGH TELEPHONE
INTERVIEWS AND IN PERSON AS PART OF THIS EXPANDED RESEARCH.
[Photo]
[Photo]
LONGS FOR A HEALTHY COMMUNITY
As part of LONGS FOR A HEALTHY COMMUNITY, Kevin Wright, Pharmacy Manager at
one of our Palmdale, California stores, delivered numerous presentations on
substance abuse to local schools and community organizations. Literally
thousands of young people have been touched by these acts of community service.
Kevin has been joined by other pharmacists throughout our Company who are
committed to the improvement of health in the communities we serve. These health
professionals represent all that is good about Longs and their example
personifies the true meaning of giving back to the community.
9
<PAGE>
During this past year we continued our work with seniors and the young. Our
Southern California stores actively supported the Juvenile Diabetes Foundation,
and several Longs pharmacists worked closely with schools on curbing substance
abuse. Our stores voluntarily served as locations for flu shots, administering
over 52,000 inoculations. In addition, our stores served as sites for
cholesterol screenings and skin cancer checks. We continue to enjoy involvement
with the American Diabetes Association, Muscular Dystrophy Association, the
Medic Alert Foundation and many other worthy causes.
IMPROVED COMMUNICATION
Effective teams rely heavily upon communication for their success. Over the past
year we extended our communication efforts to support changes that continue to
proliferate.
To help carry out our plan, we improved the communication of our goals for the
coming year. Our Financial Planning and Analysis area facilitated the
development of financial goals on a store-by-store basis in conjunction with
store and senior management. This planning discipline blends detailed historical
trends, provided by our powerful information systems, with the current outlook
and anticipated benefits of the many changes in systems currently under way.
TOWN HALL MEETINGS
Steve Roath conducted thirteen Town Hall Meetings throughout the Company last
year. Each meeting involved approximately 15 store managers in a frank and open
dialog with our Company President.
This communications tool facilitates the flow of information. Steve learns
first-hand what is on the minds of his store managers. Store managers hear
directly from our President and gain a clearer understanding of his vision and
his concerns.
Ongoing communication, using vehicles like the Town Hall Meeting, is a critical
component of the change management process. Company leaders can best make solid,
informed decisions if they can clearly see how well a change is working. For
this reason we continue to explore and refine the communication process at
Longs.
[Photo]
10
<PAGE>
Senior management encourages communication throughout our Company through
personal store visits and a variety of meetings. During calendar 1994, thirteen
Town Hall Meetings were conducted throughout the Company. Town Hall Meetings are
an open forum for dialog between our President, Steve Roath, and store managers.
Our senior management team believes in a hands-on management approach through
personal interaction with our people.
Last year we introduced PROACTION, a timely newsletter distributed to Longs
"family" of employees about once a month. This new publication complements CHAIN
REACTION, our Company newsletter, that is mailed to all Longs employees.
We also created a new video magazine called INSIGHT. We mailed INSIGHT to each
employee's home twice last year. This communications tool includes timely
messages from senior management, employee benefit information, and "hero"
stories that reinforce the best qualities of Longs culture.
LONGS TEAM
As with every organization, Longs growth and success depends upon people. We
feel a responsibility and obligation to the people whom we serve -- our
customers. We feel a commitment to our suppliers, who continue to grow in
importance as our partners, and we have confidence in Longs people to implement
our plan and continue Longs tradition of caring.
This past fiscal year was a time of preparation. We have now laid the foundation
for the kinds of enhancements that will carry our Company well into the next
century. We express pride and enthusiasm for the team we have assembled, and we
sincerely believe that we are poised to deliver on the objectives outlined in
this report.
/s/ S.D. Roath /s/ R.M. Long
S.D. Roath R.M. Long
PRESIDENT CHIEF EXECUTIVE OFFICER
Walnut Creek, California, March 31, 1995
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Sales for fiscal 1995 increased 2% over 1994, which increased 1% over 1993.
Sales in the stores acquired from Bill's Drugs, Inc. totaled $80.6 million for
1995, their first full year of operation under the Longs Drug Stores name.
Pharmacy continues to be the cornerstone of our business, accounting for 30.1%
of sales in 1995 as compared to 28.7% in 1994 and 27.0% in 1993. Photo,
Cosmetics, and Greeting Cards are other core categories complementing our
business.
The Company's gross margins improved to 26.0% in fiscal 1995 as compared to
25.5% in 1994 and 24.7% in 1993. Stronger margins are the result of pricing and
merchandising strategies implemented during the last year.
Operating, administrative, and occupancy expenses as a percentage of sales were
22.9% in fiscal 1995, 22.2% in 1994, and 21.2% in 1993. Costs were in line with
our expectations. Increases included wages, occupancy and facility charges
associated with new stores, and the first full year of operation of the stores
acquired from Bill's Drugs, Inc. in the third quarter of fiscal 1994.
In January 1995, Longs Drug Stores California, Inc. announced that it had
entered into an agreement with PayLess Drug Stores Northwest, Inc. to acquire
the inventory and fixed assets of six stores and merchandise inventory of other
additional stores in Hawaii. The transaction is expected to be completed during
the first quarter of fiscal 1996. The stores are in desirable locations in one
of our most important markets.
FINANCIAL CONDITION OF THE COMPANY
Net cash provided by operations in fiscal 1995 was $84.1 million, as compared
with $114.2 million in 1994, and $71.1 million in 1993. Expenditures for new
store construction, store remodels, dividends, and stock repurchases have been,
and will continue to be funded from operations and cash reserves. To maintain
desired working capital the Company utilizes short-term lines of credit
available from several banks.
During fiscal 1995, the Company repurchased 333,000 shares of common stock, of
which 105,000 shares were purchased from the Profit Sharing Plan, at market
values totaling $3.6 million. The remaining 228,000 shares were purchased from
the Thomas J. Long Foundation and the J. M. Long Foundation at market values
totaling $7.5 million.
The Company invested $39.2 million in capital expenditures for fiscal 1995,
$62.4 million for 1994, and $55.4 million for 1993.
12
<PAGE>
STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
For The Fiscal Years Ended
January 26 January 27 January 28
1995 1994 1993
- ------------------------------------------------------------------------------------------
---------THOUSANDS EXCEPT PER SHARE--------
<S> <C> <C> <C>
SALES $2,558,269 $2,499,224 $2,475,475
COST AND EXPENSES:
Cost of merchandise sold 1,892,851 1,863,092 1,863,172
Operating and administrative 458,533 439,004 423,959
Occupancy 126,054 114,877 100,851
- ------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME 80,831 82,251 87,493
TAXES ON INCOME 32,100 32,500 34,500
- ------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 48,731 49,751 52,993
CUMULATIVE EFFECT OF ACCOUNTING CHANGE - 3,031 -
- ------------------------------------------------------------------------------------------
NET INCOME $ 48,731 $ 52,782 $ 52,993
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
PER COMMON SHARE:
Income Before Cumulative Effect of
Accounting Change $2.35 $2.41 $2.58
Cumulative Effect of Accounting Change - .15 -
-------------------------------------------------------------------------------------
NET INCOME $2.35 $2.56 $2.58
DIVIDENDS $1.12 $1.12 $1.11
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 20,701 20,592 20,538
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
INDEPENDENT AUDITORS' REPORT
LONGS DRUG STORES CORPORATION:
WE HAVE AUDITED THE ACCOMPANYING CONSOLIDATED BALANCE SHEETS OF LONGS DRUG
STORES CORPORATION AND ITS SUBSIDIARY AS OF JANUARY 26, 1995 AND JANUARY 27,
1994, AND THE RELATED STATEMENTS OF CONSOLIDATED INCOME, CONSOLIDATED
STOCKHOLDERS' EQUITY AND CONSOLIDATED CASH FLOWS FOR EACH OF THE THREE FISCAL
YEARS IN THE PERIOD ENDED JANUARY 26, 1995. THESE FINANCIAL STATEMENTS ARE THE
RESPONSIBILITY OF THE COMPANY'S MANAGEMENT. OUR RESPONSIBILITY IS TO EXPRESS AN
OPINION ON THESE FINANCIAL STATEMENTS BASED ON OUR AUDITS.
WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING
STANDARDS. THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDIT TO OBTAIN
REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS ARE FREE OF MATERIAL
MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING
THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. AN AUDIT ALSO INCLUDES
ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY
MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION.
WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, SUCH CONSOLIDATED FINANCIAL STATEMENTS PRESENT FAIRLY, IN ALL
MATERIAL RESPECTS, THE FINANCIAL POSITION OF THE COMPANIES AT JANUARY 26, 1995
AND JANUARY 27, 1994, AND THE RESULTS OF THEIR OPERATIONS AND THEIR CASH FLOWS
FOR EACH OF THE THREE FISCAL YEARS IN THE PERIOD ENDED JANUARY 26, 1995 IN
CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
AS DISCUSSED IN THE NOTE TO THE FINANCIAL STATEMENTS ENTITLED "TAXES ON INCOME,"
THE COMPANY CHANGED ITS METHOD OF ACCOUNTING FOR INCOME TAXES EFFECTIVE JANUARY
29, 1993 TO CONFORM WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 109.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
SAN FRANCISCO, CALIFORNIA
FEBRUARY 24,1995
13
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
January 26 January 27
1995 1994
- -----------------------------------------------------------------------------------
----------THOUSANDS-----------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $ 57,518 $ 42,512
Pharmacy and other receivables 53,904 50,639
Merchandise inventories 295,346 280,524
Deferred income taxes 17,165 14,270
Other 2,734 2,537
- -----------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 426,667 390,482
- -----------------------------------------------------------------------------------
PROPERTY:
Land 76,952 77,617
Buildings and leasehold improvements 300,602 286,871
Equipment and fixtures 240,239 228,533
Beverage licenses 7,135 6,961
- -----------------------------------------------------------------------------------
Total property - at cost 624,928 599,982
Less accumulated depreciation 227,166 199,272
- -----------------------------------------------------------------------------------
PROPERTY - NET 397,762 400,710
- -----------------------------------------------------------------------------------
OTHER NON-CURRENT ASSETS 3,532 3,612
- -----------------------------------------------------------------------------------
TOTAL $827,961 $794,804
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $149,239 $142,578
Employee compensation and benefits 56,274 52,065
Taxes payable 28,459 23,179
Current portion of guarantee 2,001 1,841
Other 21,908 26,838
- -----------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 257,881 246,501
- -----------------------------------------------------------------------------------
GUARANTEE OF PROFIT SHARING PLAN DEBT 11,180 13,821
- -----------------------------------------------------------------------------------
DEFERRED INCOME TAXES 34,802 34,875
- -----------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock (20,560,000 and 20,654,000
shares outstanding) 10,280 10,327
Additional capital 107,216 104,518
Common stock contribution to Profit Sharing Plan 5,515 5,530
Guarantee of Profit Sharing Plan debt (13,181) (15,662)
Retained earnings 414,268 394,894
- -----------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 524,098 499,607
- -----------------------------------------------------------------------------------
TOTAL $827,961 $794,804
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
For the Fiscal Years Ended
January 26 January 27 January 28
1995 1994 1993
-----------------THOUSANDS-----------------
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Receipts from customers $2,554,596 $2,490,558 $2,472,834
Payments for merchandise (1,901,012) (1,840,876) (1,883,001)
Payments for operating, administrative, and occupancy
expenses (541,421) (503,891) (483,319)
Income tax payments (28,094) (31,628) (35,366)
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 84,069 114,163 71,148
- ------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Payments for property additions (39,195) (62,402) (55,384)
Receipts from property dispositions 4,422 2,349 7,310
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (34,773) (60,053) (48,074)
- ------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from (repayment of) short-term borrowings - (10,000) 10,000
Repayment of debt assumed from Bill's Drugs, Inc. - (4,613) -
Proceeds from sale of common stock to Profit Sharing Plan - - 357
Repurchase of common stock (11,077) (7,065) (6,004)
Dividend payments (23,213) (22,990) (22,812)
- ------------------------------------------------------------------------------------------------------
Net cash used in financing activities (34,290) (44,668) (18,459)
- ------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND EQUIVALENTS 15,006 9,442 4,615
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 42,512 33,070 28,455
- ------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $ 57,518 $ 42,512 $ 33,070
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net income $ 48,731 $ 52,782 $ 52,993
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 37,811 33,241 28,429
Deferred income taxes (2,968) 2,857 (1,519)
Restricted stock awards 1,889 1,350 1,993
Common stock contribution to benefit plans 5,515 5,530 4,775
Tax benefits credited to stockholders' equity 155 (324) 1,394
Cumulative effect of accounting change - (3,031) -
Changes in assets and liabilities net of effects
from acquisition of Bill's Drugs, Inc.:
Pharmacy and other receivables (3,265) (8,868) (3,663)
Merchandise inventories (14,822) 4,586 (5,625)
Other current assets (197) (433) 803
Current liabilities 11,220 26,473 (8,432)
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 84,069 $114,163 $ 71,148
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
15
<PAGE>
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Profit Sharing Guarantee of Total
Common Stock Additional Plan Profit Sharing Retained Stockholders'
-----------------
(THOUSANDS) Shares Amount Capital Contributions Plan Debt Earnings Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 30, 1992 20,441 $10,221 $ 86,434 $4,120 ($20,046) $342,485 $423,214
Net income 52,993 52,993
Dividends ($1.11 per share) (22,812) (22,812)
Profit Sharing Plan:
Issuance of stock for FY92
contribution 117 59 4,261 (4,120) 200
Stock portion of FY93
contribution 4,775 4,775
Sale of stock to plan 10 5 352 357
Reduction of plan debt 2,101 2,101
Restricted stock awards 18 9 1,984 1,993
Tax benefits related to
employee stock plans 1,394 1,394
Repurchase of common stock (173) (87) (728) (5,189) (6,004)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 28, 1993 20,413 10,207 93,697 4,775 (17,945) 367,477 458,211
Net income 52,782 52,782
Dividends ($1.12 per share) (22,990) (22,990)
Profit Sharing Plan:
Issuance of stock for FY93
contribution 132 66 4,709 (4,775) 0
Stock portion of FY94
contribution 5,530 5,530
Purchase of stock from plan (121) (60) (3,965) (4,025)
Reduction of plan debt 2,283 2,283
Restricted stock awards 5 1 1,349 1,350
Tax benefits related to
employee stock plans (512) 188 (324)
Repurchase of common stock (92) (46) (431) (2,563) (3,040)
Acquisition of Bill's Drugs, Inc.:
Stock issued 317 159 10,184 10,343
Related costs (513) (513)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 27, 1994 20,654 10,327 104,518 5,530 (15,662) 394,894 499,607
Net income 48,731 48,731
Dividends ($1.12 per share) (23,213) (23,213)
Profit Sharing Plan:
Issuance of stock for
FY94 contribution 148 74 5,456 (5,530) 0
Stock portion of FY95
contribution 5,515 5,515
Purchase of stock from plan (105) (52) (3,517) (3,569)
Reduction of plan debt 2,481 2,481
Restricted stock awards 90 44 1,845 1,889
Tax benefits related to
employee stock plans 155 155
Repurchase of common stock (228) (114) (1,095) (6,299) (7,508)
Acquisition of Bill's Drugs, Inc.,
Net of related costs 1 1 9 10
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 26, 1995 20,560 $10,280 $107,216 $5,515 ($13,181) $414,268 $524,098
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
16
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- -------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES
THE CONSOLIDATED FINANCIAL STATEMENTS include Longs Drug Stores Corporation and
Longs Drug Stores California, Inc., its wholly-owned subsidiary. All
inter-company accounts and transactions have been eliminated.
FISCAL YEARS end the last Thursday of January. Certain reclassifications have
been made to the fiscal 1994 and 1993 financial statements in order to conform
to fiscal 1995 presentation.
CASH AND EQUIVALENTS includes all highly liquid investments with original
maturities of three months or less. As of January 28, 1994 the Company adopted
Statement of Financial Accounting Standards No. 115 - "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS No. 115) which had no material
effect on the Company's consolidated financial statements for the year ended
January 26, 1995.
MERCHANDISE INVENTORIES are valued using the last-in, first-out (LIFO) method.
The excess of specific cost over LIFO values was $127.7 and $126.0 million at
the 1995 and 1994 year ends.
PROPERTY is depreciated using the straight-line method and estimated useful
lives of twenty to thirty-three years for buildings, life of the lease for
leasehold improvements, and three to twenty years for equipment and fixtures.
Software development costs associated with the Scanning Project are amortized
over estimated useful lives of eight years. Maintenance and repairs are charged
to expense as incurred and major improvements are capitalized.
OTHER NON-CURRENT ASSETS consist of pharmacy files and goodwill (resulting from
Bill's acquisition) and are amortized under a straight line method over
estimated useful lives of five to ten years.
NEW STORE OPENING COSTS, primarily labor to stock shelves, pre-opening
advertising and store supplies, are charged to expense as incurred.
INCOME TAXES - In fiscal 1994, the Company adopted Statement of Financial
Accounting Standards No. 109 - "Accounting for Income Taxes" (SFAS No. 109)
which requires the use of the liability method of accounting for deferred income
taxes. Deferred income taxes are recorded based upon the differences between the
financial statement and tax basis of assets and liabilities.
EARNINGS PER COMMON SHARE are calculated by dividing net income by the weighted
average number of shares outstanding.
LEASES AND OTHER OBLIGATIONS
A significant portion of store properties are leased, having original terms
ranging from ten to twenty-five years with renewal options covering
approximately twenty additional years in five-year to ten-year increments.
Leases provide for minimum annual rent with provisions for additional rent based
on a percentage of sales. Lease rentals for fiscal 1995, 1994, and 1993 were
$30.9, $26.5, and $24.5 million, of which $23.4, $19.5, and $17.3 million
represent minimum payments.
Total minimum rental commitments for noncancelable leases in effect at 1995 year
end were $26.3, $26.5, $26.3, $26.2, and $25.1 million for fiscal years 1996
through 2000, and $260.9 million thereafter.
On January 26, 1995, the Company had an unsecured revolving line of credit of
$30 million with prevailing interest rates. There was $30 million available for
use at January 26, 1995. The line of credit expires on June 30, 1996.
EMPLOYEE COMPENSATION AND BENEFITS
The Company has approximately 15,500 full-time and part-time employees as of
January 26, 1995. Virtually all full-time employees are covered by medical,
dental, hospitalization and life insurance programs paid primarily by the
Company. The Company also has a 401(k) plan under which employees may make
voluntary contributions.
Full-time employees with over 1,000 hours of service are entitled to Profit
Sharing Plan benefits that are funded entirely by the Company. Annual
contributions to the plan were $11.0, $11.0, and $10.0 million for fiscal 1995,
1994, and 1993. The fiscal 1995 contribution to the Plan will be made in cash
and common stock.
TAXES ON INCOME
The cumulative effect of adopting SFAS No. 109 on the Company's consolidated
financial statements was to increase net income by $3.0 million ($.15 per share)
for the year ended January 27, 1994.
Significant components of the Company's deferred tax assets and liabilities as
of January 26, 1995 and January 27, 1994 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
(THOUSANDS) 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Reserve for vacation pay $ 6,826 $ 6,862
Reserve for worker's compensation 6,272 5,522
State Income Tax 3,401 3,662
Reserve for restricted stock awards 1,991 1,562
Other 4,128 3,342
- ---------------------------------------------------------------------------
22,618 20,950
- ---------------------------------------------------------------------------
Deferred Tax Liabilities:
Depreciation 30,685 30,048
Basis of property 4,146 4,253
Inventories 663 2,019
Other 4,761 5,235
- ---------------------------------------------------------------------------
40,255 41,555
- ---------------------------------------------------------------------------
Net deferred tax liability $17,637 $20,605
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
No valuation allowances were considered necessary in the calculation of deferred
tax assets as of January 26, 1995 and January 27, 1994.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
FOR THE FISCAL YEARS ENDED
1995 1994 1993
----------------------------------
-------------THOUSANDS------------
<S> <C> <C> <C>
CURRENT
Federal $26,992 $22,986 $27,970
State 8,076 6,657 8,049
- ----------------------------------------------------------------
35,068 29,643 36,019
DEFERRED (2,968) 2,857 (1,519)
- ----------------------------------------------------------------
Total $32,100 $32,500 $34,500
- ----------------------------------------------------------------
- ----------------------------------------------------------------
</TABLE>
The reconciliation between the federal statutory tax rate and the Company's
effective tax rates are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
(THOUSANDS) FOR THE FISCAL YEAR ENDED
1995 PERCENT
- ----------------------------------------------------------------
<S> <C> <C>
Federal income taxes
at statutory rate $28,290 35.0%
State income tax net of
federal benefits 4,582 5.6
Benefits of ESOP dividends (1,243) (1.5)
Other 471 0.6
$32,100 39.7%
- ----------------------------------------------------------------
- ----------------------------------------------------------------
</TABLE>
The effective tax rate in fiscal 1994 and 1993 differ from the federal statutory
rates of 35% and 34%, respectively, primarily due to state income taxes.
GUARANTEE OF PROFIT SHARING PLAN DEBT
In March 1989, the Company sold 696,864 shares of Longs' common stock to the
Profit Sharing Plan for $25,000,000. The Plan financed this purchase with a
ten-year loan which is guaranteed by Longs Drug Stores California, Inc.
Consequently, a Guarantee of Profit Sharing Plan debt is shown on the
accompanying balance sheets with a corresponding reduction of Stockholders'
Equity. Loan repayments are made with dividends on allocated and unallocated
shares heldby the Plan and with Company contributions. Members are allocated
shares of Longs common stock equal in value to the cash dividends on their
allocated shares used to repay the loan. The Company has no obligation to
repurchase outstanding shares held by the Plan. Periodically, the Company has
been willing to repurchase shares to provide the Plan with needed liquidity.
Plan shares of the leveraged Employee Stock Ownership Plan were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AS OF JANUARY 26, 1995
<S> <C>
Allocated shares 419,119
Unallocated shares 277,745
- ------------------------------------------------------------------------------
Total 696,864
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
Loan payments are made in equal quarterly installments of $930,000, which
includes interest at 8.4% per year. The loan is being repaid from dividends on
Longs' stock held by the Plan, and Company contributions to the Plan.
Dividends paid to the Plan, and used in part to repay principal and interest on
the loan totaled $3,231,000, $3,243,000 and $3,233,000 for fiscal 1995, 1994,
and 1993.
STOCKHOLDERS' EQUITY
Authorized capital stock consists of 120,000,000 shares of common stock, $.50
par value, and 30,000,000 shares of preferred stock. There were approximately
16,400 (UNAUDITED) shareholders at the end of fiscal 1995.
Each outstanding share of common stock has a Preferred Stock Purchase Right
(expiring in September 1996) which is exercisable only upon the occurrence of
certain changes in control events. There have been no events that would allow
these rights to be exercised.
During 1988, a Restricted Stock Award program was adopted whereby certain
individuals may be granted stock in the Company. The restrictions provide that
while recipients have voting rights to the shares, transfer of ownership of the
shares is dependent on continued employment for a period of five years. In 1994,
a new Restricted Stock Award program was adopted which is similar to the 1988
program except as it relates to the transfer of ownership of shares. The
transfer of shares is dependent upon continued employment for a period of not
less than one year. The unrecognized portion for these programs ($3.2 million)
at January 26, 1995 has been netted against Additional Capital. During fiscal
1995, 1994, and 1993; 93,400, 11,700 and 21,200 shares were awarded under these
programs.
The Board of Directors approved a program in August 1989, under which the
Company may repurchase up to three million shares of its outstanding common
stock. As of January 26, 1995, the Company had repurchased 1,554,000 shares at a
cost of $58.5 million.
In November, 1994, the Board of Directors discontinued this Plan and authorized
a new Plan to repurchase up to two million shares of the Company's outstanding
common stock.
During fiscal 1995, the Company repurchased 105,000 shares of its common stock
from the Profit Sharing Plan at market values totalling $3.6 million. In
addition, the Company repurchased 228,000 shares of common stock from the Thomas
J. Long Foundation and the J. M. Long Foundation at market values totaling $7.5
million.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," the carrying value of the Company's current assets and
liabilities, and Guarantee of Profit Sharing Plan debt approximates the
estimated fair value.
LITIGATION
During the first quarter of fiscal 1994, the Company announced that the states
of Hawaii and Nevada, and Federal regulatory agencies were inquiring into the
procedures which Longs followed when billing Medicaid programs. The billing
procedures in question were changed in 1990 for Hawaii and 1992 for Nevada. The
Company fully cooperated in the inquiry, reaching a settlement with the state of
Nevada in August 1993 for $750,000, and reaching a settlement with
18
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
the state of Hawaii in November 1994 for $2.4 million.
These settlements had been reserved for previously and did not impact current
quarter or year-to-date results. The Company does not expect any future required
reimbursements to the Federal regulatory agencies, exclusive of penalties, to be
material to the results of operations or financial position. If major penalties
were imposed, the effect on earnings could be material.
ACQUISITION OF BILL'S DRUGS, INC.
In September 1993, the Company purchased (in a non-cash transaction)
substantially all of the assets of Bill's Drugs, Inc. (Bill's), a chain of drug
stores located in Northern California. The transaction was reported under the
purchase method of accounting. The purchase was made by issuing approximately
317,000 shares of the Company's stock with a value of $10,343,000 and by
assuming liabilities of $13,614,000 for a total purchase price of approximately
$23,957,000.
Results of operation of the Bill's stores after the purchase date are included
in the Statements of Consolidated Income presented herein. The following
pro-forma information assumes that the acquisition had taken place as of the
beginning of each period presented, and includes adjustments for additional
depreciation and amortization reflecting the fair market value of the assets
acquired.
Earnings per share were computed as if the shares issued in the acquisition of
Bill's had been issued at the beginning of each period presented. The proforma
information is not necessarily indicative of the results of operations as they
may be in the future or as they would have been had the transaction been
effected on the assumed dates.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(THOUSANDS EXCEPT FOR THE FISCAL YEARS ENDED
PER SHARE ) 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C>
Sales $2,548,757 $2,555,013
Income before
cumulative effect of
accounting change 48,716 51,823
Per Share $2.34 $2.48
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
ACQUISITION OF PAYLESS' HAWAII STORES
On January 24, 1995 Longs Drug Stores California, Inc., with the Board of
Directors' approval, announced that it has entered into an agreement with
PayLess Drug Stores Northwest, Inc. to acquire the inventory and fixed assets of
six stores and the merchandise inventory of other additional stores in Hawaii.
The acquisition is expected to be completed during the first quarter of fiscal
1996.
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA (UNAUDITED) AND FIVE YEAR SELECTED FINANCIAL DATA
(THOUSANDS EXCEPT PER SHARE)
NET SALES GROSS INCOME (1) NET INCOME EARNINGS EARNINGS DIVIDENDS STOCK PRICE TOTAL
MARGIN PER SHARE (1) PER SHARE PER SHARE RANGE ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
QUARTER
1st $ 622,259 $164,990 $13,021 $13,021 $ .63 $ .63 $ .28 $31-32 $800,534
2nd 626,310 163,124 12,034 12,034 .58 .58 .28 33-34 787,301
3rd 614,461 156,302 6,422 6,422 .31 .31 .28 33-34 817,744
4th 695,239 181,002 17,254 17,254 .83 .83 .28 33-34 827,961
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 1995 2,558,269 665,418 48,731 48,731 2.35 2.35 1.12 31-34 827,961
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
QUARTER
1st 607,979 153,184 10,923 13,954 .53 .68 .28 33-37 729,646
2nd 609,346 155,539 12,963 12,963 .63 .63 .28 31-35 726,436
3rd 597,202 153,386 8,935 8,935 .43 .43 .28 31-34 778,197
4th 684,697 174,023 16,930 16,930 .82 .82 .28 31-34 794,804
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 1994 2,499,224 636,132 49,751 52,782 2.41 2.56 1.12 31-37 794,804
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total 1993 2,475,475 612,303 52,993 52,993 2.58 2.58 1.11 32-40 726,190
Total 1992 2,365,916 589,989 55,379 55,379 2.71 2.71 1.07 33-44 689,251
Total 1991 2,333,767 573,769 59,622 59,622 2.94 2.94 1.02 31-44 648,403
<FN>
(1) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE IN FIRST QUARTER AND FISCAL
YEAR 1994.
</TABLE>
19
<PAGE>
DIRECTORS
- --------------------------------------------------------------------------------
Richard M. Brooks* Edward E. Johnston*
FINANCIAL CONSULTANT INSURANCE CONSULTANT
William G. Combs Robert M. Long
VICE PRESIDENT, ADMINISTRATION CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
David G. DeSchane
RETIRED Mary S. Metz, Ph.D*
VICE PRESIDENT / DISTRICT MANAGER DEAN, U.C. BERKELEY EXTENSION
Ronald A. Plomgren Thomas R. Sweeney
SENIOR VICE PRESIDENT, DEVELOPMENT RETIRED
VICE PRESIDENT / DISTRICT MANAGER
Stephen D. Roath
PRESIDENT Frederick E. Trotter*
PRESIDENT, F. E. TROTTER, INC.
Harold R. Somerset*
BUSINESS CONSULTANT * MEMBER OF THE AUDIT COMMITTEE
SENIOR OFFICERS OFFICERS
- ------------------------- -------------------------
Bill M. Brandon** Les C. Anderson**
SENIOR VICE PRESIDENT VICE PRESIDENT, PERSONNEL
George A. Duey** Al A. Arrigoni**
SENIOR VICE PRESIDENT VICE PRESIDENT, CONSTRUCTION
Orlo D. Jones William G. Combs
SENIOR VICE PRESIDENT, VICE PRESIDENT, ADMINISTRATION
PROPERTIES AND SECRETARY
Jack G. Daleth**
Robert M. Long VICE PRESIDENT / DISTRICT MANAGER
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER Don D. England**
VICE PRESIDENT / DISTRICT MANAGER
Ronald A. Plomgren
SENIOR VICE PRESIDENT, Jim L. Famini**
DEVELOPMENT VICE PRESIDENT / DISTRICT MANAGER
Stephen D. Roath Dave J. Fong**
PRESIDENT VICE PRESIDENT, PHARMACY
Dan R. Wilson** Brian E. Kilcourse**
SENIOR VICE PRESIDENT, MARKETING VICE PRESIDENT, CHIEF INFORMATION
OFFICER
Ron E. Lovelady**
VICE PRESIDENT / DISTRICT MANAGER
OFFICERS
- ----------------------------
Sal Petrucelli**
VICE PRESIDENT / DISTRICT MANAGER
Mike K. Raphel**
VICE PRESIDENT, REAL ESTATE
Gerald H. Saito**
VICE PRESIDENT / DISTRICT MANAGER ANNUAL MEETING
------------------------------
Clay E. Selland The Annual Meeting of Stockholders
TREASURER will be held at the Regional Center
for the Arts, 1601 Civic Drive,
Joe P. Spampinato** Walnut Creek, California on
TREASURER Tuesday, May 16, 1995 at 11:00am.
All stockholders are cordially
Kyle J. Westover** invited to attend.
VICE PRESIDENT, TRAINING AND
COMMUNICATIONS
** OFFICER OF LONGS DRUG STORES
Grover L. White CALIFORNIA, INC. ONLY
VICE PRESIDENT, CONTROLLER
Bob W. Wilson**
VICE PRESIDENT / DISTRICT MANAGER
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GENERAL OFFICE
- --------------------------------
141 North Civic Drive
P.O. Box 5222
Walnut Creek, California 94596
(510) 937-1170
TRANSFER AGENT AND REGISTRAR
- --------------------------------
Chemical Trust Co. of California
50 California Street
10th Floor
San Francisco, California 94111
(800) 647-4273
For assistance on address change,
consolidation of multiple
holdings, dividend payments or
related matters, please contact
the Transfer Agent.
AUDITORS
- -------------------------------
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
GENERAL COUNSEL
- -------------------------------
Bell, Rosenberg & Hughes
1300 Clay Street
Suite 1000
Oakland, California 94612-0220
STOCK LISTING
- -------------------------------
New York Stock Exchange, Inc.
Ticker Symbol-LDG
Newspaper quotations:
"Longs Drg" W. S. J.
FORM 10-K
- -------------------------------
A copy of the Company's Form
10-K Annual Report and Form 10-Q
Quarterly Reports filed with
the Securities and Exchange
Commission may be obtained
without charge by writing to
the Corporate Treasurer, Longs
Drug Stores, P. O. Box 5222,
Walnut Creek, California 94596
/ / printed on recycled paper
<PAGE>
LONGS DRUGS 1995 ANNUAL REPORT -- ADDENDUM
Listing of Photographs found in the 1995 Annual Report:
Page 1 - Picture of our store in Kona, Hawaii.
Page 2 - Picture of a few products sold in our stores.
Page 3 - Picture of Bob Long, Chairman of the Board and Chief Executive
Officer, and Steve Roath, Company President.
Page 4 - Picture of a Marketing Group: Ron Lovelady, VP and District
Manager; Veronica Brauns, Director of Systems and Programming; Terry
Burnside, Merchandise Manager; Dan Wilson, Senior VP, Marketing; and
Diane Fournier, Financial Analyst.
Page 5 - Picture of a woman sitting at her computer.
Page 6 - Picture of two employees reviewing shelf merchandise.
Page 7 - Picture of three employees, part of our Merchandise replenishment
teams, stocking merchandise on the store shelves.
- Picture of a distribution warehouse.
Page 8 - Picture of a planning session: Pat Takahashi, Financial Planning
Manager; Clay Selland, Treasurer; and Marty Stephenson, Alameda
District Manager.
Page 9 - Picture of Kevin Wright, Pharmacy Manager at our Palmdale, CA store.
- Picture of a customer focus group.
Page 10 - Picture of Steve Roath, Company President, leading a Town Hall
Meeting.
<PAGE>
Deloitte & Touche LLP [Letterhead]
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
2-97578, 33-12653 and 33-54959 of Longs Drug Stores Corporation on Form S-8
of our report dated February 24, 1995 incorporated by reference in this
Annual Report on Form 10-K of Longs Drug Stores Corporation for the year
ended January 26, 1995.
/s/ Deloitte & Touche LLP
April 14, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-26-1995
<PERIOD-START> JAN-28-1994
<PERIOD-END> JAN-26-1995
<CASH> 57,518
<SECURITIES> 0
<RECEIVABLES> 53,904
<ALLOWANCES> 0
<INVENTORY> 295,346
<CURRENT-ASSETS> 426,667
<PP&E> 624,928
<DEPRECIATION> 227,166
<TOTAL-ASSETS> 827,961
<CURRENT-LIABILITIES> 257,881
<BONDS> 0
<COMMON> 10,280
0
0
<OTHER-SE> 513,818
<TOTAL-LIABILITY-AND-EQUITY> 827,961
<SALES> 2,558,269
<TOTAL-REVENUES> 0
<CGS> 1,892,851
<TOTAL-COSTS> 2,477,438
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 80,831
<INCOME-TAX> 32,100
<INCOME-CONTINUING> 48,731
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,731
<EPS-PRIMARY> 2.35
<EPS-DILUTED> 2.35
</TABLE>
